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How much does it cost an employer to retrench an employee?

1 January 2003
– 3 Minute Read


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In this economic climate, many employers may be contemplating retrenchments, and the cost of retrenchment is an important question that employers have to take into account. The payments to be made to an employee who is retrenched are governed by the Basic Conditions of Employment Act 75 of 1997 (“the BCEA”), the employer’s own internal retrenchment policies (if any exist), past practice as well as the employee’s individual employment contract.

The BCEA requires that an employee be paid a minimum of 1 weeks’ remuneration, which is, cost to company and not simply salary, per completed year of service.  “Remuneration” is defined as any payment in cash or in kind made to an employee pursuant to her employment. This payment is referred to as “severance pay”. The question of whether performance bonuses are included in the calculation of remuneration for the purpose of severance pay is a tricky one, and will depend on the provisions of the employer’s policy relating to performance bonuses.

Where an employer has a retrenchment policy in place in terms of which it has committed to paying severance pay that is more favourable than that prescribed by the BCEA, then the employer is required to pay severance pay in accordance with such policy. It should be noted that the statutory minimum payment set out in the BCEA or in the employer’s retrenchment policy does not relieve an employer from attempting to reach consensus with an employee on severance pay during the retrenchment consultation process, as the employee may seek an improvement on the statutory minimum severance pay or on the severance pay paid in terms of the employer’s retrenchment policy. An employee who unreasonably refuses to accept an employer’s offer of alternative employment is not entitled to severance pay.

In the event that an employer does not require an employee to work her notice period, the employer must pay the employee the remuneration she would have earned during the notice period. An employee’s notice period is normally contained in the employee’s contract of employment. However, in the event that the employee does not have a written contract of employment or if the contract of employment is silent in respect of the notice period, then section 37 of the BCEA will apply. Section 37 of the BCEA prescribes the minimum notice periods.

Upon termination of employment, an employee is also entitled to payment for any period of annual leave that has accrued to her but which has not yet taken as at the date of retrenchment; payment of any retirement benefits in terms of the rules of the applicant fund as well as any other amounts owing to her in terms of her contract of employment, such as, a pro-rated 13th cheque.

Lastly, it should be noted that there could potentially be additional costs for an employer in the case of large scale retrenchments as contemplated in the Labour Relations Act, 1995.